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12.2.11 Weekly Recap

Gold continued to shine in analysts’ eyes this week as eurozone leaders scrambled to find a solution to Europe’s ongoing debt crisis. Adrian Day, president of investment firm Adrian Day Asset Management, reflected this week on reasons why people have been buying Gold the past two years, citing “concern and distress of fiat currency paper money.” Day said, “Gold is a solid asset which is going up.” Central banks around the world came up with an agreement to aid financial markets, while China made the unusual move to cut the reserve requirement ratio (RRR) for commercial lenders.

Earlier in the week, the International Monetary Fund (IMF) denied that it was in talks to provide monetary aid to Italy; many analysts still expect that the IMF will have little choice but to act if the European economic crisis comes to a boiling point. There was speculation that Germany might float additional bonds together with the eurozone’s five other triple-A rated nations and then use the proceeds to help Italy and Spain, but Germany quickly denied this speculation. Finance ministers from the eurozone gathered this week at the headquarters of the European Union in an effort to rescue the euro and thereby protect the rest of the world’s economy from a debt-related financial collapse. Also, global central banks reached an agreement to lower dollar-swap ratios to “ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.” Alan Valdes, director of floor operations and vice president of trading at DME Securities, said, “The markets rallied with the news. But if you stop and think about it, you have to realize what kind of danger the world is in for all the central banks to get together and save Europe.”Some warned that this agreement could backfire and pose a risk to U.S. economic expansion.

Credit ratings were predominant in the news this week as reports came out that France could lose its AAA credit rating as the result of a downgrade by Standard & Poor’s (S&P). Fifteen major banking institutions (including six in the U.S.) had their credit ratings downgraded by S&P this week. S&P also upgraded two Chinese banks, based on the view that banks in North America and Europe find themselves in greater danger of turmoil in the financial market, while Asia-Pacific banks have experienced relative stability. Ritesh Maheshwari, S&P’s lead analytical manager of financial services ratings across the Asia-Pacific region, explained, “Money is flowing into emerging markets, so the health of their financial systems is continuously improving, whereas in the West, banks are battling with so many issues.”

For the first time in almost three years, China’s central bank cut the reserve requirement ratio (RRR) for its commercial lenders to ease credit strains and strengthen an economy that is showing signs of weakness. China’s manufacturing sector shrink in November, which helped to clearly define that country’s decision to encourage commercial lending to boost the economy. Stephen Green, the China economist at Standard Chartered Bank in Hong Kong, said, “This is a big move — this is easing; it’s a clear signal that China is on a loosening mode. The next move will be another RRR cut in January.”

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